If intervention is necessary for a particular transaction to take place, then the transaction is inherently unsound.This should be one of those self-evident axioms. The Keynesians will immediately chime in with ten-thousand "not necessarily!" situations, which will be isolated and contrived examples, but the Austrian knows that these are rabbit trails which lead to nowhere. The Keynesians instinctively ignore the big picture. They just can't see the forest for the trees. Or the tangled snarl of equations. Free exchange results in increase in wealth precisely because both parties view the received goods as being worth more than the proffered goods. Otherwise, they don't make the exchange. Sure, there are exceptions, sometimes people do something stupid or get ripped off, but by-and-large, most exchanges result in net benefit for both parties. So nearly all transactions in a regime of free exchange are rational and beneficial, and lead to increased societal wealth. Where there is intervention, exchange will therefore be less than optimal, as some of the exchanges which take place would not have occurred otherwise. Some will be counterproductive for one or both parties, but this fact is covered over by the intervening process that pushes the transaction through. Therefore, a system with intervention will always underperform a free system, all other things being equal. In extreme cases, a system with intervention could actually be grinding itself down into poverty without even knowing it. I think that has been happening for about the last 10 years. To the entire world. I first encountered this concept when trying to understand the trade relationship between the US and China. It didn't make any sense for China to be providing the US with so many goods, while receiving so few in return. For untold tonnage of cheap stuff, China accepts a few 747's every year. Yet the exchange rate never rose. Here I encountered the "currency peg." That idea scared the living daylights out of me, because it meant that the two countries were locked into a fixed set of transactions, that would continually flow regardless of whether they were rational transactions or not. Somebody was getting ripped off. Big time. I read a lot of commentary that tried to justify the situation. It sure seemed like things were going well for both parties, but I could never buy into any of the arguments. Eventually I came to the realization that there was no way to justify unfree exchange. It just doesn't make sense. At the end of the day, economics is about exchanging stuff for stuff. You can't force an exchange to be profitable if it is not. Period. I spent a brief stint as a Chicago school follower, as Milton Friedman was the guy who put forward the idea of floating exchange rates and is generally far more freedom-oriented than anybody in the mainstream, but eventually figured out he was wrong too. I often comment that it can be useful to look at transactions as if money didn't exist, as it tends to reveal the unsound nature of many irrational economic processes. The reason that this works ought to scare us to the core: the money system is now phony and contrived. It does not function properly at all, thanks to years and years and layer upon layer of accumulated "intervention." Removing it reveals the insanity that the manipulators are trying to cover up. It reveals the irrational processes that will soon destroy us. The sad fact is, money is supposed to do precisely the opposite. Money is supposed to help us make rational decisions in a very complex world by providing a common medium of exchange. But humans just can't leave well enough alone. They have to tinker. They shouldn't.
Thursday, December 18, 2008
Debunking Keynesianism With a Single Sentence
It was a long journey from following mainstream economics in publications like The Economist and columns by Ben Stein to becoming an Austrian. But it began with a single thought, which eventually led inexorably to the Austrian conclusion: